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How Will Mortgage Rates Be Affected by the Debt Ceiling Debate?


Debt ceiling

How Will Mortgage Rates Be Affected by the Debt Ceiling Debate? - When 2013 began, Americans dodged a major economic crisis – the fiscal cliff. However, there’s more arguing going on in Washington that could have a big effect on your wallet. Specifically, if lawmakers can’t come to an agreement over the nation’s debt ceiling, it could determine what kind of interest you pay on your mortgage.

What exactly is the debt ceiling?
It’s the maximum amount of money that the federal government can borrow to pay its bills. Right now, the limit is $16.394 trillion. The debt ceiling can’t be raised without Congressional approval, and if the federal government hits the limit, the country can’t operate like it’s supposed to – at least, not without cutting massive amounts of spending. Republicans say it’s time to do just that. They say the federal government is spending money irresponsibly, and, at a time when America’s economy is trying to recover, the government can’t just keep borrowing money with no end in sight. In fact, recently, the debt ceiling has risen twice as fast as America’s tax receipts have. That means the government is borrowing twice as much money as it’s bringing in. That’s like if you were to make $50,000 a year but put $100,000 worth of purchases on your credit cards. Democrats, however, say that the debt ceiling needs to be raised in order to keep the country operating properly. In fact, they believe the debt ceiling should be eliminated altogether – meaning there would be no limit as to how much the federal government could borrow in order to fund itself.

Much like the fiscal cliff, Washington has waited until the very last second to address the debt ceiling issue. The debt ceiling will likely be maxed out sometime in late February or early March, and lawmakers are trying to deal with it right now. And, just like the fiscal cliff, the debt ceiling debate has turned ugly.

So, what does all of this mean for your mortgage rates?
If investors lose their faith in the federal government, they may demand higher interest rates – which means mortgage rates will go up. If that happens, a large incentive for buying could disappear, or at the very least, be diminished. Remember, experts have been saying that record-low rates could convince people to “get off the fence” and start buying homes before the window of opportunity closes. If home sales slow down, it would put another dent in the residential construction industry – which is just starting to gain some momentum. That could lead to job losses (just like what we saw when the housing bubble burst, albeit on a much smaller scale). And, obviously, additional unemployment is never good for the housing market. It means that fewer people have stable paychecks to spend on new homes.

But is it a given that the debt ceiling debate will dramatically affect mortgage rates?
While the housing market never thrives when there’s uncertainty in Washington, the debate itself may not be the problem. Instead, the big change in mortgage rates may not come until after a resolution is reached. And, since Republicans are currently working on a deal with would suspend the debt ceiling until May – meaning that we won’t know exactly what the debt ceiling’s future will be for several more months – we may not see any big rate changes for awhile.

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